Mortgage bailout redux: new incentives for modifying second mortgages in the Second Lien Program
The United States government launched the "Hope for Homeowners" program back in October, 2008, and so far only one loan has received final approval to refinance under this program. This week the Obama administration took another step to expand incentives to banks and borrowers to modify mortgages. This time, the plan targets second mortgages and it is called the Second Lien Program.
Second mortgages were extremely popular in the past few years because they allowed a borrower to essentially borrow 100% of the purchase price of a home and avoid a Private Mortgage Insurance payment. Typically, the insurance is required on homes with loans that were bigger than 80% of the value of the home. In order to get around this requirement, many borrowers signed up for a first loan at 80% of the value of the home, and a second loan at 20% of the value of the home. Currently more than half of troubled first mortgages are tied to a second mortgage
Now that home prices have gone down by more than 30% in most of the nation, many homeowners with second mortgages may have problems refinancing their first mortgage because they need permission from the lender of the second mortgage. Now the Obama administration is offering cash to lenders to modify these mortgages and also money to borrowers to pay on time. Here are some of the highlights of this new development.
- The second mortgage servicer gets $500 for modifying a second mortgage and $250 a year performance bonus for three years as long as the borrower continues to pay the mortgage on time.
- Borrowers can receive $250 per year for up to five years as long as they are current on the second mortgage. This will be used to pay down principal on their first mortgage.
- Non-interest only second mortgages will have interest rates reduced to 1% for five years.
- Interest only second mortgages will have interest rates reduced to 2% for five years.
- If lenders cancel or extinguish a second mortgage, they can get a payout possibly worth more than the second mortgage from the government based on a pre-set formula.
- Modification of the first mortgage automatically triggers a modification of the second mortgage if they are held by participating servicers.
- Modification of the second mortgage should not delay the modification of a first mortgage.
- The Hope for Homeowners program is now part of the Making Home Affordable Program, which means that the same incentives discussed a couple months ago will apply to the older program.
Once again, I think this an expensive and temporary bandaid on a huge wound. This could definitely give some borrowers some breathing room, but it would last only five years, and these borrowers would essentially lose all the money they pay because their home is no longer worth as much as before. The second mortgage is a financial vehicle that enabled the instant gratification mentality because it is crucial in many 100% financed homes. It seems that spending billions to sustain these mortgages is even more irresponsible than the bailouts of the past.
What do you think of this new program? Will you get your second mortgage modified?